Appetite for private lending grows

As increasingly stringent lending guidelines continue to restrict their financing choices, more and more Canadians are shifting toward private lenders – and that has some experts concerned about the potential impact on the economy.

“We’re transferring risk from the regulated segment to the unregulated segment of the market,” said CIBC deputy chief economist Benjamin Tal in an interview with Bloomberg late last year. “If we have a significant correction, clearly the unregulated markets will suffer even more because that’s where the first casualties would be. And then you will see it elsewhere.”

Mortgage broker Samantha Brookes agreed with that observation, saying that more than 90% of her business in the past few months has been sent to non-bank and private lenders, compared to the previous 50/50 mix.

For the government, it may be a case of being careful what you wish for. In a bid to prevent a US-style housing crash, the federal government has been moving to reduce its exposure to the mortgage insurance market, first by adding a stress test for insured loans in 2016. That move sent a sizeable proportion of buyers to the uninsured space, where a 20% down payment is required.

But under the latest rules that took effect January 1, these borrowers will also need to qualify at a rate two percentage points higher than their offered rate, which could lower mortgage creation by as much as 15%, according to Canada’s bank regulator.

The risks to the financial system haven’t gone away, however. In the uninsured space, mortgages are increasingly going to highly indebted households and for amortizations for longer than 25 years, according to the Bank of Canada. And increasing numbers of borrowers are turning to lenders whose activities fall outside the scope of federal regulators, including credit unions and mortgage investment corporations.

According to the BoC, credit unions currently hold about 17% of uninsured mortgages, but many expect that number to rise in the coming months.